Business Tax Flashcards
What relief is available for early trade loss reliefs
any losses that have been made in the first 4 years of the start of the trade can be used against the following 3 years in which that loss had arisen - this is done on a FIFO basis and is known as a Section 72 claim - this again is restricted to the £50,000 or 25% of adjusted trading income
What relief is available for terminal loss relief
this allows for any losses that have arisen in the final 12 months of the trade to be carried back to the preceding 3 years on a last in first out basis. The amount of relief that is available is calculated as:
6th April to the date of cessation losses + any overlap relief (this is the first part we need to consider)
next we take the 12 month losses before cessation to the 5th April and add this with the point above to get the terminal losses (we must note that if this period is a profit then we just make it nil)
In capital allowances - what is the 4 month rule
this arises when a company/partnership chooses to pay for its assets in instalments (most typically this arises when we have a deposit balance on then a final payment balance) - so we can claim capital allowances on the later payments at the date of the deposit if this amount was paid between 4 months from the obligation to pay
what do we need to consider if we have SMALL plant and machinery
this applies if the general pool after all additions and disposals have been taken into account is less than £1,000 - if this is the case we can reduce the balance to nil
what is a private use adjustment
if you are part of a sole trader or partnership assets can be used for both private and business use - you can still claim capital allowances on this asset but you can only claim the percent that is used for business purposes.
if the asset is being used by an employee then there is no adjustment that needs to be made to the capital allowances and instead the asset will be treated in the relevant P11Ds
What is a Short Life Asset
A business can make an election in respect of a Short Life Asset and this would be the case if the expected useful life of the asset is less than 8 years. by doing this we essentially ‘depool’ the asset and treat it separately. the advantage of doing this is that if the asset is sold within 8 years, the balancing charge is accelerated and you effectively get the full relief in the year of disposals.
this cant be used of the following:
- Cars and ships
- Long life assets
- Assets with partial business use
- Special rate pool items
What are some of the key features and points of a partnership that we should consider
when we are looking at partnership accounts, we need to split the process up into 3 sections:
Step 1 - Adjust the profits
- this would be like doing any standard tax computation where we have allowable and disallowable expenditure and items that need to be treated as capital
Step 2 - Allocate the profits
- the profits of the partnership are not taxed as a total against the company, instead the balance is then allocated out to the partnership (usually set out in the partnership agreement) and this then leads onto the final step.
Step 3 - taxing the partners as if they were individuals
- as stated above, the profits for the partnership are not taxed within the partnerships but instead on an individual basis. if a partner has taken out a loan in order to fund the capital contribution, then the interest on this amount is deductible from the amount of tax due. this relief is again given by the 50,000 or 25% of total income rule
Admin
- Each partnership will have a nominated partner that will register the partner with HMRC when it is first formed. this is the same with the companies tax return.
What are some of the key areas of concern when calculating a partnerships computation
when we are allocate the profits to the partners - we need to deduct any salaries and interest on capital contributions (remembering the 50,000 or 25% rule).
any losses that a partner may have are used on a individual basis.
when thinking about NICs we need to remember that they will pay Class 4 on their allocated share of the trading profit and Class 2 NICs on a weekly basis
What do we need to consider if we have had change in partnership agreement during the period
When we are doing the calculation for this, we must split it into two periods - the period and split before the change and then the period and split after the change
this can also arise if a partner joins or leaves the partnership, we just need to consider the 3 steps:
- 1, adjust the profits
- 2, allocate the profits
- 3, tax as individuals
What do we need to consider if the partnership has losses
these losses are allocated in the exact same way as profits are, these losses again can be utilised within the normal range of options and is treated on an individual basis.
we also need to consider notional losses, this arises when partners have high salaries but maybe low profits which means that the overall partnership has made a loss. where this loss has resulted in a partner having overall losses this is the notional and are not given relief under HMRC and the relief must be split between the partners which have made a profit (so if we have 3 partners with an equal sharing and one made a notional loss than this is split 50/50 between the other partners - due to an equal sharing in this example)
what are some of the simplifications available for sole traders and partnerships
firstly we need to clear up that this relief is only available to partners if they are all individuals - in order to make it simpler, they can opt for flat rate expense covers on motor vehicles and home usage
when a new vehicle is purchased, you can either claim the capital allowances for the portion of the business usage or the flat rate expenses, this can’t be changed half way through
where we have a home used for business - we can claim a flat rate deduction in line with the amount of hours worked at home - if the business premises is also used for private uses then there is a deduction per non-business occupants
sole traders can also elect for their accounts to be done on a cash basis instead of an accruals and this can only be done if the trader receipts are not expected to exceed £150,000 - if a cash basis is used then we can only carry forward losses
if a trade makes £1,000 or less than it does not need to be notified to HMRC and no tax is chargeable on the amount
what do we need to consider about farmers
due to the volatility of the trade, farmers can elect to average out their profits over two years if the lower of the two profits is less than 75% of the higher profits.
lets say we have profits of £20,000 in year 2 and profits of £10,000 in year 3 - this would mean that the lower profits (£10,000) is 50% less than the higher profits (£20,000) as this is less than 75% we can average out the profits = £10,000 + £20,000 = £30,000 / 2 = £15,000
what do we need to think about if we are making a capital gain calculations (deductible expenditure)
so we can have 3 types of expenditure
- we have our standard costs - this is just the price that we bought the asset for
- we can then have incidental costs - these will be any costs that are attributed to the actual sale of the asset such as legal fees
- and finally we can have enhancements costs which are costs that were incurred in order to get the asset up to a suitable position to be disposed of.
what is BADR and when can it be used
BADR is available when their has been a ‘material disposal’ of a ‘business asset’
this is most often applicable when a sole trader is selling whole or part of their business
or
Company directors/employees that are selling shares in their personal trading company - A personal trading company is one in which the owner has help at least 5% of the power in a company for at least 2 years prior to the disposal
the relief that is given is by taxing the gains at 10% which is subject to a lifetime limit of £1million
What is investors relief
this is gains in respect to chargeable shares are taxed at 10% - this is with a lifetime limit of £10million.
in order to meet the conditions for this you must meet the following
- the must be shares in a trading company and must have been unlisted when issued
- the must be NEW ordinary shares that were subscribed for cash on or after 17th March 2016
- the indivdual cannot usually be a director or employee of the company
- the shares must have been held for at least 3 years.
what do we need to do if we are being asked about the maximum amount of terminal loss relief available
so the first thing that we need to think about is the calculation needs to be split up into periods after 6th April 2023 and the period before 6th April 2023 - this needs to be for a 12 month period, so if trading ceases on the 30th November 2023 our effective period for the terminal loss will be the 1st December 2022
after this we can get the apportioned profit/loss for the period that starts at the 6th April 2023 to our ceasing date, we must make sure that we deduct any overlap relief
after this we can get the apportioned profits from the 5th April back to the period in which a 12 month set of accounts is made up, we need to note if we have any profits for the respective period then the balance is nil
after this we can calculate what the maximum terminal loss relief would be
When is payments for self assessment due
Firstly, all self assessments should be submitted to HMRC by the 31st January - this will allow for the tax payments of the following year to be accurately based on the PY accounts
the first Payment of corporation tax should be 50% of the prior years total tax payable and this should be made on the 31st January
the second payment of corporation tax should be the final 50% of the prior years total tax payable and this should be made on the 31st July
any final payments (balancing charges) should be made on the following 31st January - this is also made alongside any capital gains taxes which is made in a lump sum format
what are some of the factors we need to consider thinking about capital gains including when is a disposal chargeable
an asset can be charged under capital gains when it is sold or gifted - however, if the asset has been acquired as a result of a death, this is not chargeable.
any assets that have been transferred between spouses are not chargeable under CGT and the annual exemption for capital gains is £6,000 reducing down to £3,000 in the 24/25 tax year
the rate of Capital gains tax which is chargeable is based on the individuals tax bands
what are some of the factors that we need to consider when thinking about a capital gains computation
So as per usual we will have proceeds and then deduct and incidental costs which will give us net proceeds
after this we can deduct and acquisition costs & any enhancement costs that were inquired in order to bring the asset up to scratch. we need to remember that individuals do not get any indexation allowances
after this we can calculate the net gain
What is Business Asset Disposal Relief
This is relief that is given to those who sell all or part of their business. Typically the relief is given on:
- the disposal of a business asset or
- the ‘associated’ disposal of a business asset
this relief is available to:
- sole traders or partners who sell all or part of their business, this is including furnished holiday lettings
- directors or employees who sell shares in a personal trading company (this is when they hold 5% or more of the companies shares)
this relief means that the disposals will be charged at a fixed rate of 10% on a lifetime limit of £1,000,000 regardless of the individuals tax band
we also need to think about what a material disposal and what a business asset is. a business asset is either:
- whole or part of a business
- a an asset that was being used in the business at the time of cessation
- or the disposal of shares in a company (you must hold at least 5%)
how are b/f losses used in a capital gains computation
so the annual exemption amount of £6,000 needs to be utilised before we can use any brought forward losses
what do we need to consider when thinking about part disposals of an asset
so what we need to do is effectively figure out what percentage of the base costs can be attributed to the sale - say our land was valued at £200,000 and we sold a piece of land for £100,000 this would mean that effectively 50% of the assets value has been sold and therefore we need to apply this percentage to the base costs when working out our capital gains calculation
we can also have enhanced disposals - if the enhanced disposal relates to the asset as a whole, then we can give this additional relief to the portion that was just sold. but, if the enhancement exepnditure can be clearly attributed to the area of land sold, then we can include this in our calculation
what is a short lease and how do we treat for it
A short lease is deemed to have a useful life left of less than 50 years, if this is the case than we use a lease depreciation table to calculate the split of the costs that can be attributed to the proceeds as we can not deduct the full acquisition costs - this done by multiply the cost by the fraction of the percentage of life remaining by the percentage of the total original useful life of the lease
how do we treat the granting of a lease both long and short
so when someone grants a lease, this will be chargeable to capital gains taxes - depending on whether it is a short or long lease (more or less than 50 years) will depend on the tax treatment that is applicable.
if we have a long lease than gross income will be the full amount of consideration that was received for the lease. this will then need to be deducted by the acquisition costs which will be the costs multiplied by the value of the asset sold (total consideration) divided by the total consideration + the value of the asset (A/A+B)
if we have a short lease, this is slightly more complicating as we have a capital gains element and a property income element. the amount that is treated as the capital gains element is given by the following calculation = 2% x (N-1) x P where P is the premium received and N is the number of years of the lease.
the amount that is calculated will determine the capital element and the remaining balance will be treated as property income.
we can then calculate the CGT element with the figure from our calculation our acquisition costs will be the same but the top of the fraction will be our percentage of CGT calculated
what is a chattel and what are the traits of chattels
Chattels are object that’s are tangible and moveable property - if an item has a useful life of less than 50 years they are considered a wasting chattel and are therefore exempt for CGT purposes, if the asset has a useful life of over 50 years they are known as non-wasting chattels and are taxed under CGT rules
any assets that have been sold for proceeds of less than £6,000 are exempt from any CGT calculations
if the individual makes a loss on the chattel and the disposal proceeds were less than £6,000 - when calculating the allowable loss for CGT we need to pretend that the proceeds we received were £6,000 - even though the cash loss will be based on the actual proceeds received
we then need to think about the 5/3 rules - this applies if we have proceeds of more than £6,000 but the original costs was less than £6,000 - in order to calculate the maximum gain we need to firstly calculate the gain in the normal way and then we need to see what the maximum gain would be - this is done by the following formula:
5/3 x (Gross Proceeds - £6,000) = maximum gain
what do we need to consider if a chattel has had capital allowances claimed against them
this is applicable if we have a MP asset with a useful life under 50 years - this means it would be a wasting chattel and therefore exempt for CGT - however, if we claim capital allowances on that item we need to recognise any profits with CGT - NO LOSSES ARE AVAILABLE IN THIS CIRCUMSTANCES
if the asset has been used for both business and personal use - we need to apportion out the gain and costs that would be considered personal use and only make the CGT calculation on the amount used for business use - the usual 5/3 rules do apply after an asset has been approtioned
what do we need to think about when considering capital gains calculations between connected persons
first, a connected person is someone you are connected to by a family relating like a spouse etc.
for CGT purposes, any transaction must be recorded at market value. if you sold it for £60,000 and the market value was £100,000 - the deemed proceeds will be the market value of £100,000
if any loses have arisen through a transaction with a connected person - this loss can only be utilised against the same connected persons for future transactions.
if there is any transfers between married couples this is deemed to have been transferred at the base historic costs as to not give rise to any gain or loss.
what is rollover relief in regards to depreciating assets
a depreciating asset is any asset that within the next 10 years will become a wasting assets (i.e a useful life for less than 50 years) so essentially a useful life of 60 years. this will usually be for leases with a useful life of less than 60 years or fixed plant and machinery as they tend to have a useful life of less than 50 years.
if we are looking to use rollover relief against a depreciating asset we do not simply rollover the relief but instead we would look to freeze the gain - this gain is frozen until either of 3 events have pasted.
- when the depreciating asset is sold
- when the depreciating is no longer being used in the business
- 10 years have passed since the acquisition of the depreciating asset
what do we need to consider if rollover relief is to be utilised against an asset which was not fully used for business purposes
there is two steps to this - the first thing is we need to apportion the proceeds / costs & gain against the the portion of the asset that was being used for business purposes - once we have this split we then need to figure out how much of the new asset was being used for business purposes - if there is a split between business and person use then this needs to be apportioned again and then we can do our normal considerations when thinking about rollover relief.
if a £200,000 asset is used 50/50 for business and personal than the base costs of the costs of the new asset for rollover relief is £100,000 - this means our chargeable gain will be based off the £100,000 of business use and not the £200,000 of the total asset costs
what is gift relief and what are the conditions around it
gift relief is when a qualifying asset is gifted to another person. the new base costs of the asset become the market value at the time of the gift and the gain on the sale is deferred & given to the person who has acquired the asset.
a qualifying asset can be:
- shares in an unquoted company
- assets being used in a business
- agriculture or land used for farming purposes
in order to claim gift relief there needs to be a join election from the giver and receiver - this can be made up to 4 years after the end of the tax year
what do we need to consider if we have a question on the split of profits between the partners
the first thing we need to consider is if a partner has joined or left - as the share of profits will need to be apportioned to this time period
after this we need to consider if there is any salaries to consider - if so we need to make sure if these need to be time apportioned at all - for example the partners may only tax salaries once the other partner has left
finally we may need to consider any allocation of profits after the splits and salaries have been taken into account
how is Class 2 & Class 4 NICs calculated and when are these amounts payable for a 23/24 tax year
Class 2 NICs is paid on a fixed rate of £3.45 per week and this amount is payable in a lump sum at the deadline date for income self assessment - this would be the 31st January 2025
Class 2 NICs are payable depending on the amount of trading profits the company - if the profits are below the lower profit level (LPL) then no NICs are payable, if the are above this level but lower than the upper profit limit (UPL) then this rate is at 9% - any profits above this amount is payable at 2% - the due date of this is in line with the self assessment tax dates with 50% being due on the 31st July 2024 and the final 50% being due on the 31st January 2025 with any remaining balance paid as balance charge on the same date.
what do we need to consider if we have a question that has a lease premium in it
so the first thing we need to do is to calculate the amount deductible and this is done by taking the lease premium and deducting the following formula:
2% x P x (n-1): this is where p = the lease premium & N = the length of the lease, this will then give us the total assessable rental income for the landlord
after this stage we need to divide the total assessable rental income figure by the length of the lease to give us the total deduction per annum
how do we calculate a companies total taxable profits when we need to think about transitioning them to the current year basis (CYB)
the first thing we need to consider is how to spot a question like this - if we have a question that asks us to calculate a total taxable profits for 2023/24 and we have a bunch of accounting periods - we know that this will be one of those questions
1 - the first thing we need to do is to take the full profits from the AP that is before the company straddles the 6th April 2024 (for example this could be the y/e 31st December 2023, as the next y/e 31st December 2024 would straddle these periods)
2 - the next thing we need to consider is to time apportion the profits for the period that straddles the 6th April 2024 - again lets say its the period ending the 31st December 2024, this means we would need to apportion the profits by 3/12
3 - once we have our time apportioned profits we can deduct the overlap profits on commencing to give us a new total we will use in the next step
4 - in order to figure out how the profits will be split out with the new transitional rules we need to figure out the lower of two values, we will either use:
- the total profits from the preceding period used in step 1 + the apportioned profits minus over lap relief used in Step 3
or
- the the apportioned profits minus overlap relief used in step 3
5 - once we have the lower of these two values we can then divide this value by 5 as it will be given across a 5 year period to the company
6 - finally we add the profits from Step 1 & Step 5 together to give us the total taxable profits for the period ending 23/24
what do we need to think about if we have a question on capital gains tax
1 - the first thing we need to consider is the persons taxable income for the year, if this amount is above the basic rate band than all gains will be charged at the higher rate band
2 - we then need to think if there is any assets that are eligible for BADR, keeping in mind that individuals have a lifetime limit of £1,000,000
3 - we then need to consider other disposals keeping in mind that things like cars are not eligible for capital gains tax and that any assets with costs less than 6,000 and proceeds over 6,000 will need to be considered under the 5/3 rules
4 - once we have all of the gains in the computation we can then use the annual allowance between the gains - this is given as £6,000 and can be used in any order but makes sense to be used against BADR last as the tax is only at 10%
what do we need to consider when we have a question that is asking us about terminal loss relief under provisions of section 89 ITA 2007
the first thing that we need to consider is the losses/profits need to be split up into periods spanning the 6th April - so for example if the company ceased trading on the 31st May 2023 our first period to calculate would be from the 6th April 2023 - 31st May 2023 (2 months) and the next period would be from the 1st June 2022 - 6th April 2023 (10 months)
once we have figured out our periods we can then calculate our first lost or gain - we need to time apportion any profits or losses to the relevant period - after this we then need to DEDUCT any overlap relief the company had - if this nets us a profit we make it nil and if net a loss we keep this balance in the calculation
now we can calculate for the second period, again remembering to time apportion for the relevant periods - if we have a profit for one of the periods we keep it in the calculations, remember its only if the net gives us a profit that we make the whole period to nil
we can then add the two periods together to give us our terminal loss
what do we need to consider if we have a question asking about penalties for late filling
the first thing we need to remember is there is an initial £100 for a late filling penalty - regardless of the tax liability o/s
we then need to remember that there is a charge of £10 per day for 90 days for any amounts over this
after this if we have any filling o/s after 6 months then the penalty is the higher of:
- £300
or
- 5% x o/s tax liability
how do we calculate if a company is eligible for 5 year averaging of profits
the average of the profits for the previous 4 years must be less than 75% of the profits in year 5
what do we need to consider if someone has a hobby trade
- any balances under £1,000 are not taxable, it is only if receipts are over £1,000 that the balance is chargeable to tax
- if the person expenditure is less than £1,000 we can elect to increase the costs to £1,000 and this will be offset against any receipts to give us our taxable income
What are the conditions for someone to use cash basis for their accounts and what do we need to consider if someone wants to claim flat rate expenses
in order to be eligible for cash basis accounts they can not have income receipts of more than £150,000
if someone wants to claim a flat rate basis, they can only elect to do this and not claim the normal rate of expenses as well - for example if they paid utilities on the property but also wanted to claim for home flat rate expenses on the same property - they would need to choose between one or the other
the other thing to consider is flat rate expenses for motor vehicles - you can either choose to claim flat rate expenses or claim capital allowances on the vehicle - if the trader wants immediate relief on the capital asset then they can not also claim flat rate expenses attached with the use of the vehicles
What are some of the factors we need to consider if we have a question that asks taxable trading profits with adjustments to be made
the first thing we need to see is what the period of accounts have been made up for as we may need to time apportion parts of the answer
For CA:
if we have any assets that have partial private use then we may need to make an adjustment for this - However, we only need to do this if the asset has been given to an owner of the business, NO private use adjustments need to be made for Employees
we also need to consider what happens if we have a time apportioned period - we will need to apportion the CA that are claimed, this can be both longer and shorter than 12 months
For Add backs:
if we have any stock that has been taken out for the use as a gift, we need to add back the full market value of that item
we also need to consider if we have any wages that have been taken out by the owners of the business as these will essentially be drawings which are taken after tax has been deducted
if we have any pre trading expenses, these can be claimed up to 7 years prior to the trading of the business
Additional points:
we need to keep an eye out for any bank interest that may be in the accounts as these will need to be treated separately under loan relationship rules
